UK equities have underperformed their international peers in recent years, leading many investors to cut back on domestic holdings and look for opportunities in areas such as Europe, Japan and the US.
With the uncertainty created by Brexit expected to hang over the UK market for some time, this aversion is unlikely to ease any time soon. Added to this is the strong turnaround that has been seen recently in the like of Japan and Europe.
In light of this, we find out which regional trusts the analysts at investment research house Numis Securities currently look appealing.
Europe
Last year was a strong one for the European market with the Euro STOXX index posting a 17.90 per cent total return (in sterling terms) in 2017.
Numis said: “There was a marked turnaround for European markets in 2017, following a sustained period of underperformance against global markets.
“The key catalyst was a stronger-than- expected pick-up in economic growth, although sentiment was also boosted by a positive outcome in the French elections.”
Although the group does not have any strong conviction on European large-cap trusts, it does like Samuel Morse’s Fidelity European Values trust as a core holding. The £921.7m trust has made 130.13 per cent since Morse took over in January 2011, slightly lagging its average peer but beating the FTSE World Europe ex UK.
Performance of trust vs sector and index under Morse
Source: FE Analytics
At the moment, Morse is concerned that the European market is vulnerable to earnings disappointments and geo-political shocks, given high valuations and expectations for continued earnings expansion. This is leading him to focus on “good quality companies that can grow their dividends over the long term”, with the likes of Royal Dutch Shell, ABN Amro and Sampo being its largest overweights.
Numis’ analysts also like JP Morgan European Smaller Companies and TR European Growth from the European small-cap space.
The JP Morgan trust is managed by Jim Campbell, Francesco Conte and Edward Greaves, although Campbell has been on personal leave since March 2017. Numis said this has not led to any changes in the investment strategy.
The £662.3m trust has made a 272.46 per cent total return over the past decade, beating the 226.20 per cent made by its average peer and the 145.95 per cent rise in its Euromoney Smaller European Companies (ex UK) benchmark.
TR European Growth, which is run by Janus Henderson’s Ollie Beckett, has made 241.71 per cent over 10 years and is currently the peer group’s best performer over the past one, three and five years.
Japan
Like Europe, the Japanese market had a strong 2017 thanks to improving investor sentiment and a strengthening macroeconomic environment. Many are positive on the country for the coming year and Numis likes two trusts in this space: Baillie Gifford Japan and JP Morgan Japanese.
Baillie Gifford Japan has established a strong long-term track record, having made 432.23 per cent over the past 10 years. It is the IT Japan sector’s highest returning member over one, three, five and 10 years.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust’s lead manager, Sarah Whitley, is set to retire in April 2018 with Matthew Brett taking over as portfolio manager and Praveen Kumar as deputy portfolio manager. Numis said investors need not be overly concerned by the changes as the trust’s long-term approach with a focus on mid caps will continue.
“Reflecting its strong long-term performance record, Baillie Gifford Japan has typically traded on a premium in recent years, and has issued shares to meet investor demand,” the analysts added. “It remains to be seen whether this premium will be impacted by Sarah’s departure. However, we believe the fund remains an attractive core holding for exposure to Japan.”
Numis’ other recommendation, JP Morgan Japanese, has a similar approach to the Baillie Gifford trust in that manager Nicholas Weindling focuses on ‘next generation businesses’ exploiting secular growth themes such as factory automation and e-commerce.
The £703.m trust has lagged its average peer over the past 10 years with a 185.05 per cent total return. However, it has performed much stronger over more recent timeframes and is the sector’s second highest returner over one-, three- and five-year periods.
North America
Turning to the US and Numis’ analysts highlighted Garrett Fish and Eytan Shapiro’s £914.7m JP Morgan American trust as a strong offering from the space. The trust has beaten its average peer over one, three, five and 10 years; it has also outpaced the S&P 500 by a wide margin over the past decade.
“JP Morgan American’s long-term track record is respectable in a market that has typically proved difficult for active managers to outperform. It has delivered NAV total returns of 12.0 per cent per annum over the past decade compared to 12.1 per cent per annum from the S&P 500,” the analysts said.
“Following a performance review in H1 2017, the manager has resolved to run a slightly more concentrated portfolio and show a more ruthless approach to cutting underperforming holdings (with a target active share of circa 75 per cent). We believe that the change to a slightly higher conviction approach is positive, and regard it as an attractive way to gain mainstream exposure to the US equity market.”
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
When it comes to the small-cap space, Numis went for JP Morgan US Smaller Companies. This £159.8m trust is headed up by Don San Jose and Daniel Percella.
San Jose and Percella have a stock-picking approach, targeting quality businesses with durable franchises, strong management teams and stable earnings that are trading on attractive valuations.
The broker’s analysts highlighted the “impressive track record” since San Jose took over in May 2009. Since then, it has generated a 398.16 per cent total return, compared with a 224.90 per cent gain from its average peer and a 265.02 per cent rise in the Russell 2000.